A Tale of Two Franchisors and Their Resale Process

Our Dallas, TX office recently engaged two different franchise brands for reselling existing locations within the respective franchise systems. The franchise brands are from completely different industries, but have the following common characteristics:

  • Both franchisors have been in business for over 30 years.
  • Both franchisors have a history of incredible growth in number of units as well as average unit volume.
  • Both franchisors are well-respected brands – having many times over the past several years been designated as the leader in their respective business categories by a variety of franchise ranking publications.

This is about where the similarities end! During the engagement process we became familiar with each franchisor’s procedures and personnel that support the franchisees in executing their exit strategies. And, the differences couldn’t be more pronounced!

Franchisor A

  • Provides franchisees with a “Resale Manual”, which guides the franchisee through the resale process, including checklists for Buyers and Sellers.
  • Has specific qualification requirements for buyers that are clear to everyone involved in the process.
  • Offers franchisees guidance on their business valuation using historical data from actual past transactions within the franchise system.
  • Advises the franchisee on any décor or system upgrades that will be required during the resale process.
  • Assists franchisees with marketing their resale opportunity through relationships with 3rd party business brokerage firms.
  • Speaks directly with prospective buyers early in the process to reinforce the benefits of the brand and guide the potential buyer through the franchisor resale procedures.
  • Will convert potential “new franchise prospects” to a resale opportunity if the resale characteristics are of interest to the buyer.
  • Offers educational classes for franchisees regarding Exit Strategy Planning at their annual conventions.
  • Provides flexibility with regards to training deadlines and timelines for both buyer and seller to ensure timeliness in concluding a transaction.
  • Provides buyer and seller with template agreements (LOI and Purchase Agreement) to streamline negotiations, but with clarification that both parties should secure the appropriate legal advice.
  • Assigns specific corporate personnel to assist franchisees throughout the process. Executive personnel available for additional consultation.
  • Brokers have easy access to corporate personnel to address any issues during the process – reinforcing that the goal is to find a qualified buyer and support the exiting franchisee’s desire to sell and achieve a reasonable return on their investment.

Franchisor B

  • No guidance was offered directly by franchisor, only to emphasize their right to approve any transfer of the franchise.
  • Uses the “Area Developer” system to support the “local” franchisee resale process. The franchisor did not want to assess or communicate with a prospective buyer until such time as the buyer had completed a review process with the Area Developer, and a Purchase Agreement was fully executed between buyer and seller.
  • The developer would only communicate with the franchisee, not a broker. A buyer candidate could not meet the area developer prior to a one-time per month educational “seminar” regarding the franchise system.
  • Prospective buyers were told that décor and equipment upgrade requirements would be enforced at some point in the very foreseeable future. However, various prospective buyers over a six-month period were told of costs ranging from $15,000 to $80,000 for the upgrades – with the stipulation that the upgrade requirements were still not final! Advertised costs to open a new franchise location range from a low investment of $100,500!
  • It could take 3 – 6 months, as quoted by the area developer, for a potential buyer to be vetted and officially approved by the franchisor, at which time the buyer would still need to complete the franchisor training program prior to closing on the transaction.

Our experience in working with Franchisor B was extremely frustrating. We submitted five candidates for approval that had agreed terms with the seller. Four of the five candidates were not approved by the area developer – with no reason given for any of the four declines. One candidate had a net worth in excess of $5M, and all candidates exceeded the financial requirements for “new” franchisees as advertised by the franchisor. Two of the candidates had previous food industry experience, which happened to be the industry involved. The 5th candidate decided to terminate the transaction due to delays in the approval process. All five of the candidates were disappointed in the process, and now have a negative view of the brand. I doubt seriously they will ever be customers of the brand in the future.

During this same time period we concluded multiple transactions with Franchisor A. We submitted only one buyer candidate that was not approved by the franchisor – the finances were simply too tight for the franchisor to have comfort with the deal, and the candidate was appreciative of the professionalism shown during the review. I think it is safe to say the candidate will continue to be a fan of the brand and may at some time in the future be a viable buyer.

Now for the interesting part! Over the last 4 years, the franchisors have experienced very different results in the evolution of their business models.

Franchisor A

The total number of domestic stores operating at the end of calendar year 2018 indicates a net growth of 21% over a four-year period. The total network wide revenue increased 23% during the same four-year period.

Franchisor B

Total number of domestic stores operating at the end of calendar year 2018 indicates a net decline of -4% during the same four-year period. The total network wide revenue declined -5% during the same four-year period.

Summary

There can be any number of reasons why one franchisor achieves continued growth while another experience decline. I’m not suggesting that the franchise resale process is the sole reason! However, based on our experience it certainly doesn’t surprise me to see the results of these two brands.

Franchisors often use cliché terms like “We want the franchise sale to be a win – win”, or “Be in business for yourself but not by yourself”. Some franchisors validate these sentiments by the way they support their franchisees in every aspect of their business life. Unfortunately, other franchisors do damage not only to their brand but to the entire franchise industry by not living up to the very talking points by which they sell new franchises. And, selling new franchises is all some franchisors are interested in, rather than also assisting franchisees with a smooth and satisfying exit from the brand after many years of brand ownership.

Assisting franchisees with a franchise resale is the right thing to do, but also the smart thing to do. Assistance will likely result in higher resale values, which will help validate the business model for those buyers considering opening a new franchise. It’s also beneficial at times to have new energy enter the franchise brand. And often, a new owner is needed to turn a struggling location into a successful one.

Perhaps franchisors should live by the credo of “assisting a franchisee to be as happy with the franchise brand on the day they exit the business as they day they purchased the business”.

 

About the Author
Larry Lane is the owner of VR Business Brokers of Dallas, TX, which is part of the worldwide franchisor organization that has been servicing small to medium size privately held companies since 1979. Larry spent 21 years as an executive with FASTSIGNS International. During his tenure the company grew from 15 stores to 540 stores operating in six countries. Larry has been a franchisee in the VR Business Brokers network for the last 10 years. For more information about VR Business Brokers of Dallas, please call 214-733-8282, email llane@vrdallas.com or visit www.vrdallas.com

 


Run Your Private Company Like It’s Public

Small businesses often operate as if their sole purpose is to fund the owner’s lifestyle, but the most valuable companies are run with financial rigor. You may be years from wanting to sell, but starting to formalize your operations now will help you predict the future of your business. Then, when it does come time to sell, you’ll fetch more for what you’ve built because acquirers pay the most for companies when they are less risky. There’s nothing that gives a buyer more confidence than clean books and proper record keeping.

Jay Steinfeld is a great example of how to run a business like a public company. Steinfeld studied Accounting at the University of Texas and joined KPMG after college. His wife owned a small retail store selling blinds and window treatments. The store was successful, but by 1994, Steinfeld had noticed a little Seattle-based outfit that was trying to hawk books online. This company with the peculiar name “Amazon.com” started to succeed in selling books online and Steinfeld wondered if he could get consumers to buy blinds online.

Soon after, Blinds.com was born.

Unlike many of the first-generation online companies that were run with little financial controls, Steinfeld grew Blinds.com like an accountant. He was determined to run his business with the same rigor as a publicly listed company. He built an experienced management team and took the unusual step of assembling an outside board of directors even though Blinds.com was private and Steinfeld owned all of the stock.

The board met quarterly and each of Steinfeld’s senior managers were asked to prepare and deliver formal presentations to his board. Steinfeld hired a big four firm to complete a full audit of his financials each year even though all he needed to satisfy Uncle Sam was a simple tax return.

By 2014, Blinds.com had grown to 175 employees and, at more than $100 million in revenue, was the largest online retailer of blinds in America. Even though Home Depot had close to $90 billion in sales at the time, Blinds.com was outperforming them in its tiny niche, which – coupled with their fastidious bookkeeping — made Blinds.com absolutely irresistible to Home Depot. On January 23, 2014, Home Depot announced its acquisition of Blinds.com.

Running your business like it’s public will make it more predictable as you grow and ultimately a whole lot more attractive when it comes time to sell.

 

Is your business creating maximum value?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

Sellability Score


5 M&A Advisors on What Sellers Worry About Most

Article written by Meghan Daniels  and provided courtesy of Axial.net

Selling a business is a big decision, and a little anxiety about the process is normal. We asked five M&A advisors about the biggest concerns they hear from clients.

What’s the top concern you hear from prospective sellers, and what’s your advice?

Dexter Braff,  The Braff Group

Once we get past price and terms, the “softer” elements of the deal become more meaningful. Will the buyer retain most of my employees? Will they carry on the legacy of the business? If the seller is not retiring, how restrictive will the covenants not to compete be? How long will the seller be on the hook for any post-deal issues that are covered by indemnification language?

Depending on just how important these, or any other items, are to a seller, they may choose to incorporate language addressing them at the letter of intent stage, before due diligence and crafting the definitive purchase agreement. That said, sellers should take care not to add so many provisions such that letters of intent become de facto purchase agreements, less they slow the momentum down or frustrate the buyer. Better to address the “want-to-haves” (as opposed to the “have-to-haves”) later on in the process, when the buyer becomes more invested in the transaction and may be just a bit more accommodating to insure a successful close.

Robert Rough,  Telos Capital Advisors

We had a big increase in inquiries about selling in Q4 2018 when the public markets fell off, there was lots of talk of recession, and trade tariffs were a big item. Prospective sellers were concerned that they had missed “the top”. In general, prospective sellers’ biggest concern seems to be leaving money on the table by selling too early. We counsel our prospective clients against trying to time the market, especially since it takes so long to close a transaction once you begin the process. Buyers are generally pretty smart; if you wait until the market in your industry has peaked or a recession has begun, you probably waited too long. Buyers will price the uncertainty of the depth and length of the trough into their bids, if they even bid at all.

Sellers should sell when the market is good, their business is solid, and potential buyers can still envision some upside.

Allie Taylor, Orange Kiwi

The list of concerns varies widely, but often includes things like “will I get a fair enterprise value”, “what will I do after I sell”, “how do I avoid paying too much tax”, “will I have enough money to do what I want”, “are the multiples really the highest they will get or should I wait”, “who do I trust, my CPA, attorney, wealth and asset manager, coach…”, “how do I resolve competing advice”… and the list goes on.  What owners that have achieved successful transactions (meaning they are happy 12 months later) ask is, “How do I get the transaction I really want?”

No matter what the concern, my advice is often the same: a) the presenting concern is rarely the real issue holding an owner back from successfully selling their business; b) achieving a successful transaction depends on the owner’s ability to  conquer their own psychology  so that it does not get used against them; c) this requires owners engage in creating clarity about what they do and do not want for 22 variables in 3 domains (business, money, and self). This understanding increases the owner’s control of their exit and enables them to avoid making compromises they later regret.

Keith Dee,  Osage Advisors

“What is the value of my company in today’s market as I am constantly getting calls from people looking to buy my business?”

Our advice to them is that after running your company for 10, 20, 30, or more years, you owe to yourself to test the market when you are ready to sell. By hiring an investment banker who will run a controlled auction process for your business, potential buyers will competitively bid for your company and set the current market price. The business owner will then have options to choose who he thinks the best buyer is for his business based on several factors including price, culture, what’s best for his/her employees, and the legacy of the company

Steve Raymond,  The DAK Group

Sellers are constantly asking us questions like: When is the “best” time to sell my business? It seems that we are in a seller’s market now; should I put my toe in the water now or should I wait to generate stronger revenue or profitability? Am I leaving money on the table not selling now?

All businesses are unique, and the market for them is just as unique.  When selling a business, an owner has to consider a myriad of issues. Valuation, while important, is not the only consideration. Owners need to consider not only what is best for themselves, but also for the business. Think carefully through the implications of a sale, both to the owner and the business.  This exercise will allow the owner to prioritize what is most important. Allow these priorities to set the timing and the potential targets in a sale process. An owner is more likely to develop a successful outcome when success is defined at the front end.

 

Is now the time to consider selling your business?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

Sellability Score


Timing the Sale of Your Business

by Peter C. King, VR Business Brokers/Mergers & Acquisitions, CEO

In a perfect world, business owners sell their companies when banks are anxious to lend, the economy is strong, their industry is booming and the business is enjoying record profitability, with the future looking even brighter. Naturally, a perfect convergence of all these variables would enable you to maximize the value of your business allowing you to sell it at the highest price and on the best terms.

But most business owners don’t sell when market conditions are perfect. Instead, they make the decision for more personal reasons, such as retirement or to free up cash to pursue other investment opportunities. Unfortunately, many businesses are sold when the owner dies unexpectedly or is otherwise unable to run the business. These unplanned events increase the chance that the business will realize a lower selling price than it would in better circumstances.

QUESTIONS TO ASK

Before you make the decision to sell, you need to ask yourself several questions. First, how motivated are you to sell? Selling a business is an arduous process that can take a year or more from the initial valuation to finding a buyer to finalizing the deal.

Second, have you adequately prepared your business to be sold? Most experts agree that owners should plan for the sale of their business at least three years in advance. You may even want to plan for an eventual sale as you’re still establishing and building your business.

But even if you have no current plans to sell, managing your company as if it will be sold is likely to result in a more efficient, financially viable business. For example, your business plan whether a formal or informal document should evaluate growth opportunities, market position, and business goals, and explain how progress in reaching these goals will be measured. Not only is your business plan an important tool in unlocking the current value in your company, but it also serves as initial prospectus for prospective buyers.

INTERNAL AND EXTERNAL FACTORS

Keeping an eye on economic cycles and how they affect the merger and acquisition market is important. The market for privately owned companies can be just cyclical as that for publicly traded companies. Economic recessions, for example, generally mean there are fewer buyers. General economic weakness can also result in a drop in your business’s profitability and a perception among buyers that your business is a risky acquisition.

Also be aware of your business’s growth cycle and plan to sell when sales growth has reached a peak. Of course, this isn’t always easy to calculate, and typically requires the help of outside advisors. Further, you are better positioned to sell if your company boasts valuable patents, brands, proprietary products or a lucrative market niche.

Businesses are typically valued on a multiple of earnings. Your business’s earnings, therefore, must be transparent and documented. Many deals are funded with bank debt, and most lenders won’t finance a transaction without stable cash flows that can be verified through solid financial statements. Buyers also usually look for breadth of management because it reduces the company’s dependence on the departing owner and allows the buyer to learn the business from an experienced management team.

There are also a number of relatively minor things you can do to enhance the perceived value of your company and make it more attractive to purchasers. Cleaning up and organizing the office, factory and warehouse space is an inexpensive enhancement. Repairing or replacing equipment may cost a bit more, but will help you attract buyers seeking a turnkey operation. Finally, consider disposing of unproductive assets or old inventory that buyers don’t want to be burdened with.

MAXIMIZING YOUR SELLING PRICE

Selling your business can be time-consuming a complex process, but you’re likely to maximize your selling price by planning the event well in advance and by engaging qualified advisors to assist you. While a deal can often be put together quickly, maximizing value means that selling your business may take time. Remember, you don’t want to feel pressured to take the first offer, or to accept terms that are less favorable.

 

Is now the time to consider selling your business?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

Sellability Score


Why You Should Exit While You’re Ahead – A Cautionary Tale

The very best time to sell your business is when someone wants to buy it. While it can be tempting to continue to grow your business forever – particularly when things are going well — that decision comes with a significant downside.

Take a look at the story of Rand Fishkin who started his entrepreneurial journey when he joined his mother’s marketing agency as a partner:

When Fishkin realized how much his Mom’s customers were struggling to get Google to display their company in a search, he immersed himself in the emerging field of Search Engine Optimization (SEO).

He began writing a blog called SEO Moz, which led to an SEO consulting and software company. By 2007, Moz was generating revenue of $850,000 a year when Fishkin decided to drop consulting to become solely a software business.

The company began to grow 100% per year and by 2010, Moz was generating around $650,000 in revenue each month, attracting the attention of Brian Halligan, co-founder of marketing software giant HubSpot.

HubSpot wanted to buy Moz and was offering $25 million of cash and HubSpot stock – an offer almost five times Moz’s $5.7 million of revenue in its last complete financial year.

But Fishkin wasn’t satisfied. He believed a fast growth Software-as-a-Service (SaaS) company was worth four times future revenue and was confident Moz would hit $10 million by the end of that year.

Fishkin counter offered, saying he would be willing to accept $40 million. HubSpot declined.

New Plans Ahead

Instead of selling Moz, Fishkin raised a round of venture capital and started to diversify away from SEO tools into a broader set of marketing offerings. The further Moz veered away from its core in SEO, the more money his business began to lose.

By 2014, Moz was in full crisis mode, and Fishkin had begun suffering from a bout of depression. He decided to step down as CEO, describing his resignation as a “lot of sadness, a heap of regrets and a smattering of resentment.”

Fishkin became a minority shareholder in a company he no longer controlled where the venture capitalists had preferred rights in a liquidity event.

A Lesson Learned

In the ensuing years since turning down Halligan’s offer, HubSpot went public on the New York Stock Exchange and had been worth nearly 20 times as much.

Fishkin revealed that today, his liquid net worth is $800,000 – much of which he was about to spend on elder care for his grandparents. The Moz stock he holds may or may not have value after the venture capitalist get their preferred return. At the same time, Fishkin estimated HubSpot’s offer of $25 million in cash and HubSpot stock would now be worth more than $100 million (based on the increased value of HubSpot’s stock).

Fishkin’s tale is a cautionary reminder why the best time to sell your company is when someone wants to buy it – a story that is shared in his book Lost and Founder: A Painfully Honest Field Guide to the Startup World.

What if an offer was made for your business today? Would you be ready to sell? Would you regret if you said no?

 

Is your business creating maximum value?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

Sellability Score


Leaving a Legacy: Why Some Sellers Choose ESOPs

Article written by Arielle Shnaidman and provided courtesy of Axial.net 

While Employee Stock Ownership Plans (ESOPs) have long been good exit options for smaller companies, in the last few years larger middle market businesses have started considering ESOPs as an exit strategy as well. Companies worth hundreds of millions of dollars that could have easily sold to private equity firms have opted to go the ESOP route. An ESOP allows employees to buy an interest in a company while at the same time giving the owner liquidity. 

Alberto Toribio del Pilar, a managing director with the St. Louis, Missouri-based boutique investment bank ButcherJoseph believes owners of larger companies are more frequently considering ESOPs because they are becoming a more proven way to realize meaningful value at closing while implementing a significant employee retirement benefit. 

As a firm, ButcherJoseph has a niche focus on ESOPs. The key tax advantage of this exit option is the ability for a seller (under the right circumstances) to defer capital gains tax on the sale of their business to an ESOP. ButcherJoseph works with sellers to figure out how to best structure their deal to get those tax advantages based on the market value of the business. These types of deals require the business to borrow money — usually against the assets or cash flow of the business — which is why companies with many assets to borrow against or healthy margins are typically a good fit for an ESOP exit strategy. 

For example, Nation Safe Drivers (NSD), a roadside assistance company, recently completed an ESOP in Boca Raton, Florida with ButcherJoseph’s help. “We explored several exit strategies, and we were by far the most intrigued with Employee Stock Ownership Plans. Our company has tremendous potential, and we wanted to share this future success with the dedicated employees who will continue growing NSD,” said Andrew Smith, NSD CEO in the press release.   

Leaving a Legacy 

At first glance, the clear tax advantages of an ESOP exit option for business owners seems like reason enough to pursue this option. However, tax benefits are rarely the only reason sellers pursue this option. 

“Maximizing cash at close is typically not the most important element of the deal for sellers in most of these cases, because these folks already have money,” says del Pilar. “They think about the ESOP structure because it’s an amazing opportunity for their employees.” ESOPs are not often the most lucrative option for the seller. First, while offering fair market value, ESOPs typically cannot match the high multiples offered by private equity firms. Sellers of an asset-heavy business could also see a bigger return by dissolving the company and selling off the assets. 

But for business owners who have put their blood, sweat and tears into building a company for many years, money isn’t necessarily the only factor when it comes time to exit. 

An ESOP allows employees to secure a portion of their retirement investment through their work and ownership. For example, ButcherJoseph worked with a 35-year-old Midwest-based aviation business on an ESOP. 

The business could have sold off its assets, which were worth more than the business as a whole, but the owner wanted to make sure his employees were taken care of. He was a highly-regarded figure in his community with family in the business along with tenured employees and a large technical group of mechanics who took care of the aircrafts. He didn’t want his company bought and relocated. For these reasons, selling his business to a private equity firm or competitor was not an option. 

The owner of the business worked with ButcherJoseph for several months to structure the deal. This involved working out management incentive plans to create an environment for performance and ensuring the owner would receive a certain amount of income after close. After the seller realized value at closing, he positioned himself as a creditor by providing seller financing. As a lender he receives principal and interest for the remaining value of his business at closing. 

Potential Risks 

Typically, ESOPs work best for companies that have strong, tenured management teams that can run the business efficiently after the owner exits. Additionally, companies should have a good collateral base with healthy margins to borrow against for the ESOP structure. The underlying business should be relatively solid and not subject to peaks and troughs. 

While ESOPs are good exit options for many, deals can go wrong if they’re not structured correctly. If the deal is done at too high of a valuation, or companies violate covenants with lenders, the deal can go south. Finally, selling the business, but not transferring control is also a way to run a foul with the rules and regulations governing ESOPs. A true board or voting mechanism needs to be put in place to ensure proper corporate governance. 

 

 Is your business creating maximum value? 

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:  

Sellability Score


Number of Small Businesses Changing Hands Dips Slightly, But Market Remains Ripe for Buyers & Sellers

Small business transactions in the first quarter of 2019 experienced a modest year-over-year decline but remain at historically high levels, according to the latest BizBuySell Insight Report, a nationally recognized economic indicator that aggregates statistics from business-for-sale transactions reported by participating business brokers nationwide. A total of 2,504 sold businesses were reported in the first three months of 2019, a 6.5% decline from the same period last year. Similarly, Q4 2018 saw a 6% decrease from the same quarter in 2017. 

It is important to note that both 2017 and 2018 set new records for the most annual small business transactions since BizBuySell started reporting the data in 2007. So while reported deals are down slightly from a year ago, the market continues to be very active compared to the previous decade. In fact, Q1 2019 represents the second highest first quarter on record, trailing only 2018. It is too early to tell if the recent plateau marks any kind of market shift or not. To gain additional perspective, BizBuySell also surveyed business owners and some leading brokers, the results of which are incorporated within this report. 

A number of factors could be tempering the strong transaction growth rates seen in recent years. Most notably, these include the recent government shutdown, low unemployment, record profits, deal financing, and general uncertainty around the impact of administration policies relating to tariffs, immigration, and health care. 

“Main Street business sales may have been impacted in part due to a stronger economy where individuals are more satisfied as employees (not looking to purchase businesses) and business owners are seeing higher profits (not looking to sell their businesses)”, said Jeff Snell, Chairman of the International Business Broker Association, the industry’s leading trade group. “Also, time to complete business transactions has increased marginally, potentially as a result of the Federal Government budget shut down which closed SBA loan guarantee processing offices. However, broker optimism through 2019 remains strong”, Snell added. 

“The business sale market still continues to perform strong in 2019 in terms of number of deals getting done and the multiples sellers are receiving. However, we are seeing signs that the market could become more challenging in the future with interest rates rising and financing becoming both more expensive and harder to acquire. This can make the buyer process lengthy and more difficult, which would suppress multiples and extend time to close”, said Jessica Fialkovich, President, Transworld Business Advisors of Denver. 

Of course, it is also possible the past two quarters have been outliers and 2019 will continue on its multi-year growth trend in upcoming quarters. It is something to watch closely as data comes in over the rest of the year. Inventory remains strong, with a 6.1% increase in listings in Q1 over the same quarter last year. 

“After several years of record activity, it’s good to see that there are still plenty of listings coming on to the market, so the small decrease in activity may be more about buyers taking a cautious approach than a slowdown in the supply,” Bob House, President of BizBuySell.com & BizQuest.com, said. 

 

Is now the time to consider selling your business? 

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:  

Sellability Score


The One Number Owners Need to Stop Focusing On

The value of your business comes down to a single equation: what multiple of your profit is an acquirer willing to pay for your company?

profit × multiple = value

Most owners believe the best way to improve the value of their company is to make more profit – so, they find ways to sell more and more. As experts in their industry, it’s natural that customers want to personally engage with them, which means spending more time on the phones, on the road and face-to-face to increase sales.

With this model, a company can slightly grow, but the owner’s life becomes much more difficult: customers demand more time and service, employees begin to burn out, and soon it feels like there are not enough hours in the day. Revenue flat lines, health can suffer and relationships get strained – all from working too much. Does this feel familiar?

If you’re spending too much time and effort on increasing your profit, you could find yourself diminishing the overall value of your business. The solution? Focus on driving your multiple (the other number in the equation above). Driving your multiple will ultimately help you grow your company value, improve your profit and redeem your freedom.

What Drives Your Multiple

Differentiated Market Position

Acquirers only buy what they could not easily create, so expect to be paid more if you have close to a monopoly on what you sell and/or are one of the few companies who have been licensed to provide the specific product or service in your market.

Lots of Runway

Most founders think market share is something to strive for, but in the eyes of an acquirer, it can decrease the value of your business because you’ve already sopped up most of the opportunity.

Recurring Revenue

An acquirer is going to want to know how your business will do once you leave – recurring revenue assures them that there will still be a business once the founder hits eject.

Financials

The size and profitability of your company will matter to investors. So will the quality of your bookkeeping.

The You Factor

The most valuable businesses can thrive without their owners. The inverse is also true because the most valuable businesses are masters of independence.

 

 Is your business creating maximum value?

Complete the “Value Builder” questionnaire today in just 13 minutes and we’ll send you a 27-page custom report assessing how well your business is positioned for selling. Take the test now:

Sellability Score


How to Reduce Owner Dependence Before a Sale

Article written by Meghan Daniels and provided courtesy of Axial.net

CEOs: What would happen if you went on vacation for a month and left your business to run itself?

If your answer is “everything would fall apart,” or “what’s a vacation?” chances are good that your business is highly dependent on you. This may not seem like a problem now, but when it comes time to think about selling your business, it may well be.

“Contrary to popular belief, buyers are highly risk-averse,” says Steve Raymond, Managing Director of New Jersey-based investment bank The DAK Group. Owner dependence (or dependence on any key person) is a major driver of risk, and as such can mean sellers don’t get the price or terms they want during a transaction.

Robert Rough, Managing Director of Dallas-based investment bank Telos Capital Advisors, says that smaller companies tend to be more owner-dependent. There are also certain types of businesses — e.g., dentists’ offices, insurance agencies, or law firms — where “the owner is almost always a major rainmaker. It all comes down to what role the owner plays, for example how involved he or she is in customer relationships and sales,” says Rough.

If you’re thinking about selling your business, here are a few suggestions to help mitigate the risk of owner dependence.

1. Make moves well in advance of a desired sale.  
When Jim O’Keefe, the founder of Wisconsin-based commercial millwork manufacturer O’Keefe, started thinking about planning for an exit, he had a clear life goal of being completely out of the business by the time he was 65 years old. “He’d started the business when he was in his early 20s and built it out of his garage,” says Dan Mulvaney of Sunbelt Midwest Business Advisors, which advised O’Keefe. Five years out from his desired sale timeline, “he brought in professional management and went from running the business to being an absentee owner, which added a lot of value to the business.”

O’Keefe ended up selling to Ninth Street Capital Partners, a middle market private equity fund based in Cleveland. The connection was made on Axial. The process was highly competitive in large part due to Jim O’Keefe’s prudence in stepping back early. “When we bring a business to market that has a management team in place that will stay post-closing for a long time, that broadens the market dramatically amongst buyers. A lot of buyers have the cash, but they don’t have the talent or operator who can jump in full-time and take over for the business owner,” says Mulvaney.

2. Bring in an independent board.
“Generally speaking, if you’re going to be selling a business within a year, you don’t have enough time to bring in a board,” says Raymond. But for those with enough lead time, creating a board is a great way to mitigate risk for a potential buyer by ensuring long-term business continuity. Board members also bring in outside perspectives and experiences that can improve business practices and help owners and existing management identify and address any challenges in the company. While there may be resistance to the idea, independent boards can be particularly helpful for family businesses, where long-established dynamics and a lack of outside experience can sometimes obstruct a business’s full potential.

3. Build out the management team.
“A lot of privately held businesses operate without a true CFO, somebody who understands treasury and sophisticated financial reporting. Bringing in a CFO is an easy step that can be done in a short time frame,” says Raymond. Bringing in a COO is also an option, although sometimes that can be done concurrently with the transaction. “Buyers, particularly PE buyers, will sometimes want to bring in an outside expert as part of the deal to help mitigate the risk, usually referred to as operating partner.”

In some cases, the business may not be large enough to justify bringing in either a CFO or a COO. In these cases, Rough recommends working on addressing areas of the business that will directly impact revenue first. “Customer relationships and sales are probably the most worrisome areas for a potential buyer,” says Rough. “Most buyers will be able to find someone to manage the books and keep the trains running on time. But they want to make sure that they won’t lose revenue. You want to make sure that there’s someone in the company who will be staying and can ensure continuity for key relationships.”

In general, think about delegating and distributing responsibilities. “If the owner just decides to replace themselves with a younger version of themselves, that doesn’t necessarily solve the problem,” says Rough.

4. Document key information.
Business processes shouldn’t just live in your head. If you go to Tahiti for two weeks, your team should know how to keep things running and have all the information they need to make informed decisions. Prospective buyers will want to see that these processes are well-documented to make knowledge easier to transfer post-close.

Owner dependence is just one issue in a business, but it’s often tied up with other risks that buyers discover in due diligence — lack of a true management team, a shaky handle on financials, intellectual property concerns, problematic legal agreements with customers or vendors, etc. As a seller, the more you think through these problems and take steps to address them in advance of a sale, the more likely you are to achieve the valuation and terms you’re looking for. Consulting with an investment banker or advisor before you want to bring your market is the first step and can help you evaluate where you are and what areas you should address first. “The more a company professionalizes their business and looks internally before a sale, the more interest they’ll get from buyers and the more likely they are ultimately to close a deal,” says Raymond.

 

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Valuation vs. Terms in a Business Sale

This article is provided by Brent Beshore, courtesy of Axial.net.

The following is an excerpt from investor Brent Beshore’s recent book, The Messy Marketplace: Selling Your Business in a World of Imperfect Buyers. Beshore is founder and CEO of adventur.es, a Midwestern-based permanent equity firm. 

As a seller, it can be easy to fixate on the numbers. “My business is worth X. I’m going to get Y cash at close.” These figures will represent some of the largest you’ve seen in your lifetime. The focus on valuation is understandable, but remember that structure and terms are equally important in negotiation.

When negotiating with a qualified and trustworthy investor (a.k.a. the type of buyer you probably want), you should take advantage of their expertise. While this may seem counterintuitive, they have spent their careers understanding creative ways to structure a deal, from responsible options and uses of debt to how to properly incentivize existing leadership to ensure a smooth transition. Your best path is to tell them what is important to you and why, and also what you recognize to be the risks in the deal. Then let them explain what options may satisfy both parties best. To be clear, I’m not suggesting blind trust in a buyer regardless of reputation, or your intuition. Always approach a proposed solution with open-minded skepticism.

To illustrate, here are a handful of scenarios:

QUICK EXIT: You tell the buyer that you will only consider an offer that provides all cash at close because of grave health concerns. Immediate liquidity is priority number one. You are asking the buyer to assume all responsibility and liability for not only the future prospects of the organization, but also the transition post-close. The buyer will apply a discount and the resulting valuation will likely be substantially less than a deal with more structure over a longer time period.

MARKET-BASED EXIT: You tell the buyer that you have a target valuation range, providing research that backs up why you believe it is reasonable for your business. The buyer will compare your research against their own, and also the circumstances of your company. Sellers sometimes bring forth research on industry-relevant com- panies unrelated in scale, leadership depth, and earnings history, which a buyer will quickly disregard. If the research is valid, how- ever, the buyer will likely calculate a similar valuation range (it may not be exactly the same, but they’ll tell you why) and focus on structure and terms. What percentage will be earned out to ensure performance? What guarantees will be outlined about key employees and customers?

BRIGHT FUTURE EXIT: You tell the buyer the company is set up for future growth, you have confidence in the projections provided, and, while you need some immediate liquidity, you want to share in the upside. The buyer will structure the deal to share risk and reward.

Valuation and terms for each of these exit scenarios will be varied, and that’s a good thing. They’re creative solutions. It’s key to remember what’s important to you and evaluate the options against those criteria. And above all, communicate your interests clearly.

There are no hard rules in valuation. A buyer doesn’t have to match another buyer’s offer, accept your presented adjustments, or meet your demands on timeline or payment structure in their offer. And, you don’t have to sell. Every value and formula is negotiable.

 

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